The Bullish Percent Index for the gold sector (BPGDM) triggered a sell signal last Thursday.

We warned of this possibility one week ago when the BPGDM hit 100. It can’t get any higher than that. 100% of the stocks in the index were trading with bullish technical patterns.

That may seem like a good thing, at first. But, it’s really an indication of just how overbought the sector has become. And, when the BPGDM turns lower from an overbought condition, it generates a “sell” signal.

And, that’s what happened on Thursday.

Of course, a sell signal doesn’t mean that gold stocks are headed for some sort of devastating decline right away. Previous signals have varied in their duration and their severity.

But, it does mean that gold stocks are unlikely to rally much higher from here in the weeks ahead. Traders looking to add exposure to the gold sector will probably have a better chance to do so a month or two from now.

And, for folks who may need a little more reason to be cautious on gold stocks, the GDX/Gold ratio is flashing a warning sign as well.

We get this ratio by simply dividing the price of the VanEck Vectors Gold Miners Fund (GDX) – a market basket of gold stocks – by the price of gold. This ratio tells us how strong or weak gold stocks are relative to the metal.

You see… action in gold stocks tends to lead the action in gold. If the GDX/Gold ratio is moving higher, it means gold stocks are stronger than the metal. That’s usually a good sign for the sector, and for the price of gold.

If the ratio is moving lower, then gold stocks are weaker than the metal. That’s usually bearish.

For the past several weeks, the gold stocks have been leading the price of the metal higher. Now though, it looks like that trend may be changing. Take a look…

This ratio hit its highest level of the year last week, as the BPGDM hit 100. In other words, gold stocks were higher – relative to gold – than at any other time over the past year.

The ratio turned lower last Thursday – just as the BPGDM generated a sell signal.

The last time we got a BPGDM sell signal, along with a reversal in the GDX/Gold ratio, was in mid-May. The gold sector fell 13% over the next month.

It’s reasonable to expect something similar this time as well.

Best regards and good trading,

Jeff Clark

Reader Mailbag

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